Earnings Preview: McDonald's Corporation (NYSE: MCD), Slower Growth In Third Quarter

UPDATE, Oct. 19, 9:32 a.m. -- McDonald's Corporation (NYSE: MCD) reported on Friday before markets opened earnings per share of $1.43 in the third quarter, a nickel less than anlaysts polled by Thomson Reuters had forecast. It generated $7.2 billion in revenue, slightly higher than the predicted $7.17 billion. Net income was $1.46 billion. The company said eight cents were shaved off this past quarter's EPS, and 16 cents so far this year, due to a stronger dollar. McDonald's stock was down by $3.19, or 3.44 percent to $89.67 on Friday morning in New York.

PREVIEW--

McDonald's, the world’s largest fast-food restaurant chain, was expected to report slightly higher earnings per share for the third quarter, partly due to its share repurchase program, but the company is showing signs that it might be in for a period of slower growth in the near term.

The Oak Brook, Ill., company will release its third-quarter results Friday before the markets open.

Analysts polled by Thomson Reuters expect McDonald’s to report earnings per share of $1.48, up from the year-earlier figure of $1.45 and revenue of $7.17 billion, up from $7.16 billion last year.

UBS lowered its EPS estimate by three cents to $1.50 on expectation that September global sales were slower.

As one of the most widely recognized quick-service restaurant brands, McDonald’s offers a glimpse of performance in the low-price restaurant sub-industry. Quick-service eateries cost less than their full-service counterparts. Slowdown in growth of this ubiquitous brand suggests fewer people are dining out even on budgets. Standard & Poor’s predicts mid-single-digit growth for fast food and 1 percent to 3 percent for the costlier full-service sub-industry.

In the last quarter, McDonald’s reported a modest 3.7 percent rise in global same-stores sales, the slowest growth since 2009. Sales in July were flat.

Factors affecting McDonald’s quarterly income included a stronger dollar, which the company estimated in July would negatively affect EPS by as much as 10 cents in the quarter and 23 cents for the year.

On Wednesday Oppenheimer analyst Brain Bittner reiterated his cautious “Perform” rating, noting that EPS estimates could be at risk for this quarter and that global same store sales could fall below 2 percent in the next two quarters.

The company issued a guidance statement this past quarter predicting same-store sales would be slower than in the second quarter. Forecasts were downgraded following the worst July same-store sales figure in nine years.

CFO Pete Bensen said in the second quarter earnings conference call that $100 million in “incremental” general and administrative investments in 2012 would negatively impact operating income growth, especially in the back end of the fiscal year.

But despite a recent slowdown in China and continued stagnation in Europe, “we see a stronger U.S. economy and believe more consumers are more willing to dine out,” said S&P equity analyst Jim Yin in a research note.

“We see significant growth opportunities in international markets, particularly in Asia Pacific, the Middle East and Africa.”

The company emerged from the second quarter with EPS of $1.32, lower than most analysts had forecast. August global same-store sales jumped 3.7 percent from the dismal July performance, attributed in part to the extra weekdays compared to August of last year and improved promotions of the company’s breakfast menu items.

Last month McDonald’s rewarded shareholders, upping its dividend from 70 to 77 cents per quarter. The next dividend will paid Dec. 17. As of the end of the second quarter the company had $3.9 billion in cash and investments.

The stock was trading Wednesday at $93.64, compared to its 52-week range of $85.92 to $102.22, up about 7 percent from a year ago. The company’s share price gained $3.22 (3.64 percent) in the quarter.

For the year, S&P expects an overall 2 percent increase in revenue, global same-store sales growth of 3.5 percent and an annualized EPS of $5.27, due in part to the company’s share-buyback program.

One of the main global competitors to McDonald’s competitors is Yum! Brands, Inc. (NYSE:YUM), the purveyor of KFC, Taco Bell and Pizza Hut, based in Louisville, Ky., which last week beat analysts’ forecasts with an EPS of 97 cents for the quarter on nearly $4 billion in revenue, a 9 percent rise for the year. Much of Yum!’s performance has been attributed to China, where the company’s brands are more popular than other foreign quick-service competitors.

As of June, McDonald’s had 33,735 restaurants worldwide.